WTO Deputy Director-General Valentine Rugwabiza, in a speech at the University of Witwatersrand in Johannesburg, South Africa on 12 April 2012, said that “with the right regulatory frameworks and political will, the potential for trade among African countries could be unlocked and contribute tremendously to the growth and development goals of the continent”.

Excerpt of her speech:

Current situation of African countries in world trade

Africa remains the most fragmented continent in the world with 54 countries with numerous border crossings. Intra-trade among African countries is very low. Last year, it stood at 10 per cent. The level of intra-trade among African countries compares unfavorably with other regions of the world. Intra-trade among the EU-27 is around 70 per cent, 52 per cent for Asian countries, 50 per cent for North American countries and 26 per cent for South American countries.

Africa's share in world trade is also small. It was less than 3 per cent last year. This is hardly surprising considering that the most integrated regions in the world are also the most competitive at the global level. The rising share of Asian countries in world trade underscores this point. Whereas Africa's trade with external partners, in particular with emerging economies is growing very fast, trade amongst African countries is stagnant. Last year, the top trading partner regions for Africa were the European Union, Asia and the United States. Africa’s trade is overly dependent on a narrow range of primary products. In 2010, fuels and mining products constituted 66 per cent of Africa's total merchandise exports.

Causes and consequences of the low level of intra-trade among African countries

Causes

Historical causes: During the colonial period, the economies of most African countries were designed to supply cheap raw materials to firms based in the former colonial powers. As an example, Ghana and Cote d’Ivoire produced cocoa, Zimbabwe and Malawi produced tobacco, Kenya and Tanzania produced coffee and tea. A rigid division of labour was a central part of the colonial system with no specialization, value addition or development of a chain production system between African countries. After attaining independence, African countries failed to address this problem. Very little diversification in terms of export products and markets has taken place. Political independence was not followed by commercial and economic independence and the trade structure inherited from the colonial times remained largely unchanged.

Inadequate infrastructure: The infrastructure built during the colonial era was outward oriented with almost no internal networks to allow trade between African countries. The good news is that spending on infrastructure began to pick up pace in the last two decades, but actual spending does not match identified needs. According to the African Development Bank, African countries need to spend around $93 billion a year to upgrade their infrastructure, but only spend about half of this amount.

Non-Tariff Barriers: Sub-Saharan African countries impose more non-tariff barriers on trade between themselves than on trade with third countries. Efforts at harmonising technical regulations and standards, Sanitary and Phytosanitary measures as well as rules of origin have been timid adding to the costs of doing business. According to the World Bank Report entitled De-fragmenting Africa, Shoprite Pty Ltd spends $20,000 a week on securing import permits to distribute meat, milk and plant-based goods to its stores in Zambia alone. There could be up to 1,600 documents accompanying each truck Shoprite sends with a load that crosses a SADC border. Africa is almost the most expensive continent in which to do business: whereas it costs around $900 to ship a container from South-East Asia, it costs almost $2000 to ship the same container from Africa. Likewise, whereas it costs $935 to import a container from South-East Asia, it costs almost $2500 to import the same container from Africa.

Consequences

Low Investment and Competitiveness: Given the low level of intra-African trade and the high cost of doing business on the African continent, foreign investors have bypassed Africa even though there are several studies which suggest that returns on investment in Africa are far greater than returns on investment in Asia and Latin America. Last year, Africa attracted less than 5 per cent of global FDI flows. Whereas China attracted $124 billion in FDI flows, African countries only attracted $52 billion.

High Vulnerability to External Shocks: With its high dependence on trade with the outside world, Africa is very vulnerable to external shocks. The over-exposure to European markets and those of the United States and Japan meant that with the recession in those countries, there was reduced demand for Africa's exports which negatively impacted on its growth prospects.

Missed Growth and Development Opportunity: The low-level of intra African trade is a missed growth and development opportunity for African countries. Several studies have indicated that if African countries were to increase their share in global trade by only 1 per cent, this would represent an additional annual income of over $200 billion which is approximately five times more than the amount the continent receives as Official Development Assistance. A steady source of income would help underpin the transformation of African economies and enable them to compete globally, as well as enable them to deal effectively with crippling poverty.

Limited Participation in Global Value Chains: Another impact of the lack of integration of African economies is the limited participation of African firms in Global Value Chains. The geographical fragmentation of production has created a new reality in global trade. Currently, trade in intermediate products accounts for more than 60 per cent of non-fuel merchandise trade and it is the most dynamic sector of international trade. The trade in parts encourages specialization in “trade in tasks” by different countries which add value to a product in the production chain. Specialization is now based on the comparative advantage of specific tasks completed by countries at specific steps along the global value chain. This new trend in global trade brings new opportunities as well as challenges. The high fragmentation of markets in Africa and high transaction costs are not conducive to the integration of African firms into regional and global value chains.

What is needed to increase intra-African trade?

Political Will: The world economy has undergone substantial transformation in recent times and it is imperative for African countries to be fully integrated into it, otherwise it would be difficult for them to alleviate poverty and attain sustainable growth and improved living standards for their people. First and foremost, what is needed is strong and lasting political resolve to remove barriers to intra-African trade. In that regard, the decision by the Heads of State and Government to focus on ways to boost intra-African trade at this year's summit is to be welcomed.

Implementation of Agreed Reforms: The priority should be to accelerate implementation of the agreed reforms at the national and regional level. What was desirable a few years back is now imperative in view of the current global context. Africa's trading partners are facing major difficulties (recession, debt crises, high unemployment rates) which are impacting negatively on multilateral cooperation, e.g. the Doha Round is at an impasse, marginal progress in climate change negotiations and for the first time since 1997, the level of ODA has decreased in 2011.

Make use of the Multilateral Trading System to support intra-African trade: There is no contradiction between measures to support the integration of African countries into the multilateral trading system and acceleration of intra-African trade. On the contrary, existing synergies could be enhanced, in particular in trade facilitation and in the removal of other non-tariff barriers.

Increased Investment in Trade-Related Infrastructure: It is essential for African countries to increase investment in trade-related infrastructure and other trade facilitation measures to reduce red tape, transaction costs and expedite the movement of goods, services and people across borders. The Aid for Trade initiative which was launched by Trade Ministers at the Hong Kong Ministerial Conference in 2005 has successfully mobilized additional resources from donor governments, regional development banks and multilateral agencies to invest in trade capacity building.

Increased Participation by Businesses and other key Stakeholders: A more active engagement of the business community and the general public in advocacy for the removal of barriers to trade in goods and services will guarantee that high priority is accorded to the reforms supporting intra-African trade.

Effective Monitoring and Accountability Systems: The regional economic communities in Africa have to set up effective transparency and accountability systems which would enable businesses and individuals to take stock and evaluate progress made towards achieving the goal of boosting intra-African trade. The African Union Commission should play a more active role in monitoring progress and providing advice and guidance when required.

Research on Impact and Costs of low Intra-African Trade: The Academic community also has a role to play in advancing the integration process by evaluating the impact of non-tariff barriers on growth, employment opportunities and poverty reduction. They could carry out research on the reasons why African firms are not fully integrated into global value chains and what it would take for them to be integrated. The recommendations would be helpful to policymakers and businesses to decide on which policies and strategies should be adopted to facilitate entry and tap into the opportunities provided by global value chains. As you may be aware, a Global Review of Aid for Trade is conducted every two years under the auspices of the WTO and the next one in 2013 will focus on global value chains.

Conclusion

The evidence is quite clear that African countries can increase trade amongst themselves if they back the political commitment to integration as contained in various regional trade agreements with the appropriate policies and actions. The entrenched view that Africa cannot trade with Africa is a myth. A country like Kenya has shown that increased trade with other African countries is possible within the right framework. The majority of Kenya’s exports (over 50 per cent) is destined for other COMESA member states, particularly Tanzania and Uganda. It is also among the largest foreign investors in these countries. South Africa has also seen its trade with SADC member states and other African countries such as Nigeria, Ghana and Kenya blossom. MTN, the South African telecommunications operator, is now operating in 16 African countries and a significant portion of its profits is increasingly coming from these countries. South African retailers are also establishing a footprint in many African countries.

All of these success stories show that with the right regulatory frameworks and political will, the potential for trade amongst African countries could be unlocked and contribute tremendously to the growth and development goals of the continent. In conclusion, as has been demonstrated, Africa can and should trade more with Africa if it is to secure its future growth and integration in the global economy. The key question, however, is how fast will this take place.